India: Income Tax

In December 2020, an arbitral tribunal ordered India to pay Cairn Energy about USD 1.2 billion, plus interest and costs, for a tax demand raised under a retrospective amendment. Three months earlier, Vodafone had won a similar case. Both claims succeeded because the investment treaties under which they were brought did not exclude tax. Under the treaties India signs today, neither claim could have been brought at all.

For an overseas business entering India, the first legal decision is not what to sell but how to be present. A liaison office, a branch, a project office and an Indian subsidiary each decide what the business may do in India, which regulators it answers to and how it is taxed.

In Fireeye Ireland Ltd v ACIT, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) allowed the benefit of the capital gains tax exemption to an Irish tax resident on sale of shares of a US LLC deriving substantial value from India, a transaction commonly referred to as an ‘indirect transfer’. While allowing such exemption, the ITAT relied on Article 13(6) of the India-Ireland Double Taxation Avoidance Agreement (DTAA) which provides that income arising from the alienation of assets is taxable only in the state of which the seller is a resident.

Income Tax Act, 1961 (‘the Act’) is governed by the fundamental rule that an assessee is required to pay only such tax as is lawfully due; the principle emanates from the mandate of Article 265 of the Constitution of India which provides that no tax can be recovered/ retained contrary to the provisions of the statute. This legal doctrine has found repeated acceptance and reiteration by the Apex Court in cases such as Mafatlal Industries and Shelly Products.

India’s Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) were designed as tax-efficient ways to invest in income-producing assets through a regulated, transparent structure. That promise remains, but three successive legislative reforms between 2023 and 2026 have changed the tax structure for these business trusts and their investors.

India’s abolition of angel tax has removed one significant tax risk from startup fundraising. But valuation, Companies Act, FEMA and legacy tax compliance obligations continue to matter.

As India continues to attract global investment, tax certainty remains a key consideration for multinational enterprises. The CBDT's APA Annual Report for FY 2025-26 highlights the growing maturity and global relevance of India's APA programme, while recent reforms under the Income-tax Act, 2025 and Income-tax Rules, 2026 reflect a stronger focus on streamlined processes and faster resolution timelines, reinforcing India's commitment to a predictable and non-adversarial tax environment.

One of the first questions businesses face while establishing a Global Capability Center (GCC) in India is whether an SEZ or a Non-SEZ location is the better fit.

The Mumbai ITAT held that Fair Market Value(‘FMV’) of ESOP shares on the exercise date would constitute the cost of acquisition under section 49(2AA) of the Income-tax Act, 1961 (the ‘Act’), notwithstanding that the related ESOP perquisite was not taxable in India. The Tribunal ruled that section 49(2AA) of the Act does not require actual taxation of the perquisite in India and directed recomputation of capital gains by considering FMV of ESOP shares as the cost of acquisition.